Shenandoah Telecommunications Company (Shentel) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Shentel provides wireless service as a Sprint affiliate, cable and broadband, fiber and wireline services across the Mid-Atlantic.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $155.2 | $158.7 | $472.9 | $469.4 |
| Operating income | $25.4 | $28.3 | $74.2 | $66.3 |
| Operating margin | 16.3% | 17.8% | 15.7% | 14.1% |
| Net income | $14.4 | $15.5 | $41.4 | $31.7 |
| Net margin | 9.3% | 9.8% | 8.8% | 6.8% |
| Diluted EPS | $0.29 | $0.31 | $0.83 | $0.63 |
| Interest expense | $7.5 | $9.0 | $23.0 | $27.2 |
- Cash flow: Nine-month operating cash flow was $193.5, versus $188.8 a year earlier. Capital expenditures were $107.0; operating cash flow less capex was approximately $86.4, compared with $96.5 in 2018. Cash at September 30 was $97.4, up from $85.1 at year-end 2018.
- Debt and liquidity: Gross term-loan debt was $740.6; debt net of unamortized loan fees was $728.0. The company made $44.7 of principal payments during the first nine months, including $30.0 in additional prepayments. Weighted-average annualized interest rate was approximately 3.63%. Management reported $172.4 of available liquidity, comprising cash and $75.0 available under its revolver. It was in compliance with credit covenants: leverage ratio 2.38 against a maximum 3.50; debt-service coverage 6.21 against a minimum 2.00.
- Margins and segments: Q3 Wireless operating income declined to $23.7 from $27.4; Cable rose to $6.3 from $5.8; Wireline was $4.9 versus $5.1. Nine-month Cable revenue grew 7.8%, while Wireless revenue declined 1.0% and Wireline revenue declined 1.5%.
Material changes versus comparable periods
- Q3 revenue fell 2.3% and net income fell 7.6% year over year, chiefly reflecting lower Wireless revenue. Wireless was affected by the Sprint travel-fee dispute, lower postpaid ARPU, increased contract-asset amortization and higher Sprint customer bad-debt expense. Subscriber growth partly offset these pressures.
- For the nine-month period, revenue increased 0.8%, operating income increased 11.9%, and net income increased 30.5%. Lower operating costs, including reduced Wireless depreciation and amortization as certain nTelos-acquired assets became fully depreciated, and lower interest expense contributed to earnings growth.
- Cable growth reflected the Big Sandy acquisition, higher video rates, expanded fiber services and demand. Wireline revenue declined, in part because of lower switched-access volumes and governmental support payments.
Outlook, risks and unusual items
- Sprint travel-fee dispute: Sprint suspended agreed payments for network travel services on April 30, 2019. Shentel continues providing the services but stopped recognizing revenue for the unpaid fee pending agreement on a prospective fee. Final dispute resolution was underway; management expected resolution by early 2020. The filing notes the Sprint affiliate relationship is significant, and Wireless operations depend on Sprint for functions including billing, customer care and collections.
- Investment and FTTH: Shentel expects continued network and infrastructure investment. It began deploying a Cable-segment fiber-to-the-home product in selected markets and expects to incur startup costs before revenue develops. FTTH business-development expenses were $1.8 for the first nine months of 2019. Capital expenditures were higher year over year, including spending on Wireless capacity and FTTH.
- Interest-rate exposure: Gross variable-rate debt was $740.6. Interest-rate swaps covered $292.6 of notional debt; management estimated a 1 percentage-point rate increase would add about $7.3 to annual interest expense before the swaps’ offsetting effect.
- Leases and accounting: Adoption of the new lease standard in January 2019 added operating lease right-of-use assets and liabilities to the balance sheet; the company said adoption did not materially affect earnings, cash flows, liquidity or loan covenants. The filing reported $400.5 of operating lease right-of-use assets at September 30.
- Controls: Previously identified material weaknesses in internal control over financial reporting had not been remediated. Management concluded disclosure controls remained ineffective at September 30, while stating the interim financial statements fairly presented the company’s results and position in all material respects.
- Subsequent events: On October 29, 2019, the board declared a $0.29-per-share dividend, payable December 2, and authorized up to $80 of share repurchases over 12 months, subject to market conditions.
- The filing provided no specific financial guidance. Management believed available cash, operating cash flow and credit facilities would fund planned investment, debt service and other requirements for at least the next 12 months, but cautioned that cash generation and borrowing availability are not assured.
Important facts for investors to verify
- Progress and outcome of the Sprint travel-fee dispute, and any revised revenue arrangement.
- Trends in Wireless ARPU, churn, subscriber additions and contract-asset amortization; the extent of ongoing reliance on Sprint.
- FTTH rollout spending, customer uptake and revenue contribution, alongside Cable-segment growth and margins.
- Debt repayment pace, variable-rate exposure, covenant headroom and liquidity. The filing gives $172.4 of available liquidity in MD&A and $172.2 as the covenant liquidity balance; confirm the definition and reconciliation.
- Remediation and testing of the disclosed internal-control material weaknesses.
- Execution, timing and funding of the announced dividend and $80 million repurchase authorization.